Williams Companies (WMB 1.29%), one of the world's largest natural gas pipeline companies, saw its stock price plummet in recent months. This precipitous drop in price conjured up visions of a takeover attempt by the board. The company adopted a poison pill to thwart such attempts. Those shareholders not attempting a mutiny will come out better off.
Shareholder rights agreement
IMAGE SOURCE: GETTY IMAGES
On March 30, Williams issued to its shareholders a dividend that gives the holder the right to purchase one share of preferred stock. The rights are effective for one year and allow the holder to purchase 1/1000th of a preferred share for $60.68 each if someone buys up 5% of the company's shares without the board's approval.
The trigger of the rights only applies to those parties that acquire 5% of the company with the intent of taking it over. If someone ends up having 5% of the company's common stock through passive investing, or after consultation with the board, the rights will not be triggered. Holding the right does nothing for the shareholder until someone tries to take the company over. Once that occurs, the shareholders can purchase the fraction of a preferred share. Unless the investor really likes Williams, they're not likely to exercise that right.
What's more likely is the company will exercise all rights at a cost to it of $0.001 per right. In the rights agreement there is an "exchange" clause that provides the right to the company to exchange all of the rights that were issued to common stock at a cost of $0.001 to the company. This will effectively double the amount of shares the company has outstanding.
Once any would-be acquirer's position has been this diluted, they'd pretty much have to buy all of the shares they already bought, again. And that's assuming the company's potential acquirer hasn't already been scared off by the huge costs this has added to any takeover attempt.
Why a takeover may not be a good thing
There are two ways to take over a publicly traded company: negotiating a price with the company's board of directors, or buying enough shares to get a takeover voted in by shareholders. The latter is known, appropriately enough, as a hostile takeover.
Companies fearing a takeover may institute any number of methods to make it more difficult, or more expensive, for the potential acquirer to buy enough stock on the open market. Williams's move makes it immensely more expensive for any potential acquirer to do so.
Williams did this specifically in response to the decline in the company's stock price over the past two months. The company may not want to be taken over for any number of reasons. Either its long-term objectives won't be met if it gets new leadership; the executives like their jobs; or, most likely, the company believes the price at which it could be taken over is much too low.
In announcing the poison pill, the company's board stated that the market is "dislocated." The price of its stock plummeted from a recent high of $29 in July last year, to below $9 in March of this year. The stock has since doubled from that low. Any party wishing to take Williams over prior to the fall in stock price is especially hungry at the current lower prices.
IMAGE SOURCE: GETTY IMAGES
There were no parties acquiring enough shares that would indicate an attempted coup. With the implementation of this poison pill, the board is showing to the investing world that they believe the company is much more valuable than its current lows.
A company being taken over is not inherently bad for a shareholder. Sometimes these takeovers can work out in the shareholders' best interest if the acquirer shares the same goals as the company currently has.
The company is likely only trying to deter the type of takeover that would end up making the party taking it over richer, while leaving the shareholders with nothing. Sometimes these are leveraged buyouts, leaving the company saddled with debt it cannot repay. Other times, the company gets acquired and its assets sold off leaving it a fraction of the size it was before the acquisition.
Luckily for them, the shareholders of Williams have a board that thinks the company is much more valuable than its current share price -- and believes it has the talent to help the shareholders realize that value. If the board is this confident in the company's value, investors may want to take a closer look at it.
